World economy
Risks to the global economy are moderating, thanks to an easing of financial
strains in the euro zone since the start of 2012. The Economist Intelligence Unit’s
forecast of a global slowdown is essentially unchanged since last month, but we
have adjusted our view on Europe and now expect less of a contraction in euro
zone GDP in 2012. We also think a break-up of the euro zone is slightly less likely than before, though sentiment remains acutely vulnerable to a reversal.
World GDP will grow by 3.1% at purchasing-power parity (PPP) in 2012.
Although preferable to the dire consequences of financial meltdown in Europe,
this by no stretch of the imagination qualifies as a robust performance. Growth
will still be slowing for a second consecutive year, and trading conditions
remain challenging. The world’s largest and most advanced economies will, as
a group, expand by little more than 1% this year. Non-OECD markets will fare
better, but they will still feel the effects of the recession in Europe on demand
for their exports. We do, however, expect world GDP growth to pick up to nearly 4% in PPP terms next year, as the euro zone returns (just barely) to growth and
as emerging markets regain some zip.
The European Central Bank has
eased financial pressures with
loans to banks worth €489bn

The most significant development in recent weeks has been the positive impact
of the injection of nearly half a trillion euros into the banking system by the
European Central Bank (ECB) in December. The ECB’s offer of cheap and unlimited three-year loans to euro zone banks reduced funding pressures and caused
government bond yields in Italy and Spain, in particular, to fall—making those
countries’ debt dynamics look less unsustainable. By early February interest
rates on routine loans between commercial banks, a measure of stress in financial markets, were at their lowest level in more than a year. These events have
reduced pressures in the US, which has very close financial ties with Europe.
The ECB is due to offer another round of three-year loans at the end of February.
In light of the ECB’s actions, and the response of markets, we have lowered the
probability of a break-up of the euro zone from 40% to 30%. That we still attach
a nearly one-in-three chance to such a disaster underlines our view that the existential threat to the single currency has not passed. The latest anxious negotiations over Greece’s bailout, and the associated scenes of violent protest, offer a
reminder that any number of trigger points could cause a sudden deterioration
in investor sentiment. A break-up of the euro zone would lead to a depression
in Europe and a serious recession for the rest of the world.
All of this means that 2012 will be an unsettled year for the global economy, further delaying what has already been a slow recovery from the 2008-09 recesgfs.eiu.com

Global Forecasting Service March 2012

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Global outlook summary

sion. In addition to the challenges facing Europe, the US economy remains in
poor shape by historical standards, despite a stream of improving indicators;
with petrol prices rising again, consumer and business confidence could easily
fade. China is also slowing, creating challenges as policymakers seek to keep
growth in the world’s second-largest economy on track.
Italy: 10-year government bond yield, %
8.0

7.0

6.0

5.0

4.0

Feb
2011

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan
2012

Feb

Source: Haver; Reuters.

Developed world
Economic data in the US have been
modestly encouraging

The US economy is showing progress on numerous fronts, and is now clearly in
no immediate danger of renewed recession unless the euro collapses. Growth
in the fourth quarter of 2011, at an annual rate of 2.8%, was the strongest in 15
months. Consumers have shown an increased appetite for spending and borrowing, and the jobs market has been improving fitfully—although unemployment remains far too high. We maintain our forecast for real GDP growth of 1.8%
in 2012. Although the US’s underlying economic problems remain far from
resolved, we even see some upside risk. If we modify our forecast for the US in
the coming months, it will probably be to raise our outlook for growth.

The recession in the euro zone in
2012 will be milder than previously
forecast

In the euro zone, we now expect a milder recession in 2012. This reflects better
data in Germany as well as the salutary effects of the ECB’s lending programme,
which will ease credit strains and thereby boost growth prospects. We have
revised our GDP forecast for 2012 to a 0.7% contraction, whereas previously we
were expecting a fall of 1.2%. Nonetheless, the environment remains extraordinarily difficult. Debt levels in many euro member states are very high, and fiscal austerity will act as a drag on growth.
Japan’s growth in 2012 will get a boost from reconstruction following the earthquake and tsunami that struck the north-east coast in March last year. After a
contraction of 0.4% in 2011, real GDP will grow by nearly 2% this year. But the
economy still faces significant short-term headwinds, as weak global demand
and a relentlessly strong yen are making life hard for exporters. Supply chains
have also been disrupted by the recent severe flooding in Thailand. The longerterm economic dynamics remain poor, reflecting deflationary pressures, weak
public finances and an ageing population.

Emerging markets
Most developing economies are in the midst of a painful adjustment to reduced
demand from their customers in the West, although this will be tempered somewhat by domestic prospects. In Asia and Australasia (ex Japan), regional economic growth will slow from 6.5% in 2011 to 6% this year. Yet the region will
remain the fastest-growing, largely because China is unlikely to experience a
hard landing. More worrying signs are emanating from India, which is relatively sheltered from global headwinds but faces a year of economic weakness as
it struggles with inflation and political paralysis. We expect Indian GDP to
expand by just 6.3% in 2012, although growth will rise above 8% again thereafter.
The recovery in eastern Europe is
losing impetus

The euro zone crisis is raising serious concerns about economic prospects in
eastern Europe. The recovery has lost momentum in recent months, and growth
will weaken further as the region’s most important market and source of investment sinks into recession. As external conditions deteriorate, domestic demand
will remain too weak to pick up the slack. Overall, we expect regional growth
to slow from 3.7% in 2011 to 2.3% in 2012. Several countries—including Hungary,
Slovenia and Croatia—are likely to tip into recession. Russia’s reliance on oil and
gas revenue will provide some insulation from problems in western Europe; its
growth prospects will continue to depend on world commodity prices.
Latin America faces a second year of economic slowdown in 2012, with regional growth set to weaken to 3.6% in the context of contracting demand in the euro
zone and tepid US growth. In response to the deteriorating outlook, the central
focus of Latin American policymakers is shifting from preventing overheating to
supporting growth. Provided that the global slowdown is not too protracted,
sound macroeconomic policies, resilient domestic demand and robust Asian
demand for commodities will mean that Latin American growth starts to accelerate again next year.
Economic growth will accelerate in the Middle East and North Africa in 2012,
bucking the trend elsewhere in the emerging world. The region is bouncing back
from the impact of the Arab revolutions, which caused sharp downturns in
countries directly affected by the unrest. The regional recovery should gather
pace in 2012, as still-high oil prices, expansionary fiscal policy, massive infrastructure development in Saudi Arabia and surging growth in Libya boost
regional GDP by 4%. But there are many risks to this broadly positive outlook,
including tensions between Iran and the West and the escalating conflict in
Syria. In Sub-Saharan Africa, economic prospects for most countries are worsening as the West stumbles and China slows. We expect regional GDP growth
to slow from 4.4% to 3.8% this year.

The US dollar has lost ground against the euro in recent weeks as global
investors have regained their appetite for risk. The ECB’s injection of liquidity
into euro zone banks in December was a key factor behind the market’s shift in
direction, and by February 9th the dollar was trading at around US$1.32:€1,
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Global Forecasting Service March 2012

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Global outlook summary

down from US$1.27:€1 in early January. However, the rise in the value of the
euro is not likely to continue. Although investors are desperately searching for
yield, which is positive for risk assets, we expect the dollar to strengthen on
average against the euro this year, to US$1.28:€1. The US’s better growth
prospects, and differences in its monetary-policy outlook compared with the
euro zone, also point to dollar strength.

Commodities
The political risk premium relating
to Iran has led us to raise our oilprice forecast

We have raised our oil-price forecast this month, and now expect dated Brent
Blend to average US$110/barrel in 2012, up from US$100/b in our previous forecast. This reflects the supply risks hanging over the market. Tensions between
the West and Iran have escalated in recent weeks with the imposition of US
sanctions on Iran’s central bank and the EU’s embargo on Iranian oil, effective
from July 1st. We think that Iran will find alternative markets (in Asia and
Turkey) for most of the oil that usually goes to Europe, and that Russian and
Saudi crude will be redirected towards Europe. However, the transition may be
disorderly, and fears of disruption will lead to a risk premium in the oil market.
Other commodity markets will benefit from loose global monetary conditions
and investors seeking return in 2012. However, more subdued consumption
growth as the Chinese economy slows, and improvements in the supply of
many commodities, will lead to somewhat weaker prices. Our industrial-raw
materials index will fall by 13% this year, for example.